If the first US session of the year is anything to go by, financial markets have started 2024 on a more circumspect note rather than the somewhat cavalier finish we saw in 2023. This is perhaps because the first big test of sentiment will arrive in the form of non-farm payrolls on Friday. The US jobs market remained hot throughout 2023 and if the December data produces any surprise to the upside, this could at the very least test the nerve of markets who are anticipating an overtly dovish FOMC in 2024.
On the flip side, if the payrolls numbers are softish, this could kickstart the momentum again for risk assets. So, with key jobs data and the FOMC minutes due before the week is out, there is an air of caution given the gap that still exists between where markets and the Fed see interest rate levels ending 2024 at.
The USD, which was on the receiving end of heavy selling duringQ4 in 2023, has started the new year on a more positive note with the currency assisted by rising bond yields. The Dollar Index (DXY) lost 2% in the last calendar year, with most of the damage being done in the final two months of the year as market attention turned to expecting rate cuts rather than any further hikes. The DXY was trading comfortably above the 106 handle in early November, though by the end of December the index was facing a battle to stay above the100 mark. To start the new year, the 10-year bond yield has climbed back to the vicinity of 3.95% and the Dollar Index reacted accordingly by crossing above the 102 level. Whether or not the USD can continue the retracement will depend upon how bond yields respond to the crucial jobs data due this Friday.
Gold continues to hold its own despite the move higher in bond yields and the USD. The precious metal didn’t pull back too much at all, with the spot price still hovering around the $2060 level (during early Asian trading hours Wednesday). There looks to be an element of safe haven buying which prevented gold from succumbing to rising treasury yields so far this week. Gold had a standout year in 2023 (having risen 13% for the year) and the prospects for 2024 are also looking constructive, should the current dovish Fed rate expectations hold. Macro data in the US during this quarter and the implications for the interest rate outlook will tell the story of whether gold makes another claim for the $2100 level in the near term.
The oil price continues to interact with the latest Red Sea shipping developments. However, the price took a turn lower despite escalations not easing, with Maersk again pausing routes in the region after another attack. Risk premium has been removed from the oil price even though there is no sign of a let-up of tensions and potential supply disruptions. But so longas any disruptions remain a ‘potential’ rather than a reality, it seems that markets are hesitant to go long on oil at the moment following the nearly 11% fall in the price last year. Energy market volatility was a feature of 2023, could be so again in 2024 given the ongoing conflict happening so close to many major oil producing nations.
